Friday, August 31, 2007

The paperless society never materialized. A paper trail is valuable in a financial dispute but many people are awash in useless paper. You can keep what you need and shred the rest.

Use might some combination of these options:

Keep a shredder where you take in and open mail. Reduce handling by making a keep-or-shred decision the first time you see something. Handling each item 3 times is like asking the mailman to triple your junk mail.

Designate a container for what you keep (an envelope for a particular utility or a carry-handle box for everything) and then winnow the contents as necessary to use “make it fit” for inventory control.

Save only a key page or part of a page (maybe a summary for the gas bill, maybe the itemized list for credit cards). You might get a 5-page statement of which you need only a third of the page.

Save only recent bills (or more of recent bills and less of old bills).

Save only “red letter day” details (important milestones).

Save only endpoints (opening and closing a loan).

Save only records of what you paid (v. what you owe, for which you often find no shortage of people to remind you).

Sunday, August 26, 2007

Net worth is a favorite topic in the buck-o-sphere (personal finance blog-o-sphere) and many people pounce on a government or media report to see how they stack up against their fellow Americans. You need to understand the source of the information and know how to read economic and financial reports correctly.

A report that comes out today might have no current data and instead be based on data from a few years ago. The 2003 SCF report used 1998-2001 data. The 2006 SCF report used 2001-2004 data. Most people will not see 2007 data until the 2009 SCF report.

Forgetting this point can lead to faulty decisions. One blogger recently linked to a 2003 article and compared his/her 2007 net worth to 2001 data.

Real (Inflation-Adjusted) V. Nominal Dollars

The SCF adjusts for inflation but its tables are not labeled as “real” dollars, making it too easy for the casual reader to assume nominal (un-adjusted) dollars. Further, the SCF uses a “current methods” adjusted CPI which assumes less of an inflation bite than the official CPI does.

How Do They Get People’s Financial Information?

The SCF is a survey, not a census. Like much government data, the results depend on “Gallup poll” types of problems such as sampling error, weighting, refusal to participate, and similar issues. The survey firm NORC conducts the survey of approximately 4,000 families to estimate the United States (a statistically significant sample). The accuracy of the Federal Reserve’s SCF depends upon the accuracy of Joe Sixpack’s financial self-knowledge when questioned by NORC.

Whose Net Worth?

The SCF’s “family” is technically the Primary Economic Unit (PEU) of a household. The SCF uses an unusual definition of “family” that includes single-person households. The PEU is a hybrid between other government definitions of family and households. The average US family is a bit over 3 persons and the average household is a bit under 3 persons.

“Age” is the age of “head” of “family” and the age of others in the PEU can vary from that, so 2 “40-year-old” households might have very different average ages (is the spouse 30 or 50?) and therefore have had different amounts of time to accumulate wealth.

What Counts?

The medians of many assets and debts are “conditional medians” that exclude zero to show a typical holding of a family that possesses the item in question (e.g., the median debt of debtors, not the median debt of everyone including debt-free people, which would lower the figure considerably).

The SCF counts a 401k but it ignores a defined-benefit pension (by the way, the proper absence of a defined-benefit pension from “net worth” is another reason why net worth is for measuring current wealth and is not very good at estimating future wealth). The SCF also ignores Social Security. The SCF appears to ignore tax liabilities.

Paper Profits

Net worth includes volatile asset prices (stocks, real estate) that can bubble or crash. Median unrealized capital gains ("paper profits") accounted for about 25-30% of median net worth for all but the youngest age group (under 35) in 2004 (before the 2005-2006 housing bubble apogee). Remember that about a quarter of median net worth is not real yet.

The only bad part about learning all this is that you might get upset more often when you see how other people misuse the SCF and similar statistics.

Sunday, August 19, 2007

FNBO achieved the seemingly impossible: It created a run on an FDIC-insured bank.

"Security" Measure Creates Mass Insecurity

FNBO Direct followed its previous threat to keep customers’ money with this new threat:

As part of your initial application, we did not receive information regarding your current employer, occupation or position. In many cases, this is because you have a status of retired, unemployed or self-employed. We are updating our records as part of our on-going due diligence to be compliant with our standards to support the USA Patriot Act.

Due to the importance of the USA Patriot Act, we have placed a hold on your account(s) until we can document this information for our records. No deposits or withdrawals can be made through your account(s) until we receive this information. We will release the hold upon receipt of this information.

Please provide us with your previous employer, occupation and position by sending an email with this information to fulfillment@fnbodirect.com. If this information is not received within 30 days, the account(s) may be closed. Your immediate attention to this matter is appreciated.

If you wish to discuss this further, please send an email to fulfillment@fnbodirect.com or call 877-370-3707. Please reference your FNBO Direct account number displayed at the top of this page when you contact us.

Thank you for choosing FNBO Direct for your Online Savings Account.

FNBO Direct Customer Service

Problems:

The email does not state that any law requires these actions. FNBO only states that you must comply with "our" (FNBO's) standards (if a law does require them, that topic is for another article).

Having money is not prima facie suspicious, unless you want to be subject to interrogation every time you pull a bill from your wallet: Do you have a receipt for that dollar? Millions of people have something called “savings” from past jobs. Maybe some bankers have nothing better to do than interrogate retired Grandma and the self-employed teenage babysitter.

The email starts by stating that FNBO does not have your “current employer” but then asks for your “previous employer.” FNBO apparently does not even know what it wants.

FNBO’s action is not due diligence. It is closer to no diligence at all. If FNBO is so worried about Grandma’s “suspicious” money, it should verify or deny before accepting her money, not after, so she can take her pension elsewhere. FNBO’s sequence of actions shows that it has few qualms about receiving Grandma’s “suspicious” money; it just dislikes giving Grandma her money back.

Some posts on the web claimed that providing more information had solved nothing so the only ray of hope for the customer is that FNBO "may" close your account if you do nothing and do not provide the information, so at least you might get your money back--a month later--maybe (hope you did not need it to pay bills anytime soon).

The email reads like a classic phishing scam when a con artist impersonates an institution to steal your identity, this time invoking FNBO and the PA instead of the Bank of Nigeria. Many businesses state that they would never send such an email asking for such personal information by email.

How To Make Things Worse: What FNBO Direct Did with Its Policy

FNBO actually managed to damage itself further by taking its bad policy and then mistakenly applying it to customers who already had provided employment information, when on August 10 it sent the above email (with its confusing, out-of-the-blue "2nd Request" title) to an untold number by accident.

FNBO then took almost 3 hours to issue an apology email, amidst a flurry of complaints from irate customers.

FNBO still did not learn its lesson because its "apology" only told customers to disregard the last email but in the next breath warned that it still could freeze your account and send you a similar email at any time: "If Due Diligence information is required, you will receive a follow-up email."

Meanwhile, FNBO Direct customers peppered internet forums and blogs with announcements that they were withdrawing their money and closing their accounts as soon as possible.

FNBO achieved the seemingly impossible: It created a run on an FDIC-insured bank.

Friday, August 10, 2007

Atom feed picked up my last blog post quickly but it took a day to appear on PFblogs.org so I am testing the time lag with this post.

Update: This post appeared on Atom feed within minutes and on PFblogs.org within an hour.

The fastest lag that I have noticed is about an hour delay but there are periods where performance degrades to a day later, which impairs the "news" value of the aggregator as almost no one will see the article when it posts to a buried position.

To my feed subscribers, do you notice any significant delay to your feed subscription?

Friday, August 3, 2007

Update 8/4/07: This article originally was based on Google Finance Beta's "10y" graph on 8/3/07 but the "10 year" graph did not cover 10 years (thanks, Google) so I re-adjusted the article for 8 years.

If you expected 12% per year, you expect to find your $100 investment to have grown to $260 after 8 years, a 160% increase over your initial value.

De Ja Vu: "Hey, this is where I started!"

However, the Vanguard 500 spent the better part of the last decade in the V-graph pattern of our simple hypothetical: The VFINX share price was about $130 about 8 years ago and closed at about $132 today, which is about 0% growth after 8 years.

Real Negative Returns

If inflation were about 3% per year, then the Vanguard 500 performed as if it had been losing your money at -3% per year.

The real value of your initial $100 is now about $80. You lost 20% of your real money over the last 8 years.

Opportunity Costs

Some say, "Invest as early as possible!", but today you can buy VFINX at about the same dollar price (less in real terms) as 8 years earlier and have the same nest egg at retirement as the person who invested 8 years before you--and meanwhile your money could have been accomplishing other things for the past 8 years.

Some say, "Invest instead of paying off your mortgage!", but someone who had a windfall 8 years ago and chose to invest the lump sum in the Vanguard 500 instead of paying off a mortgage would have done even worse than the real 20% loss by adding the mortgage's real negative return to the VFINX's real negative return.

"In the long run, we are all dead." -- John Maynard Keynes

VFINX eventually will rise again and you can find other timeframes with higher returns on investment (ROI) but remember that certain investments or markets can be flat or worse for a decade. Even if Investment A beats Investment B in the long term (several decades), Investment B might beat Investment A in the short- or mid-term. You might have an immediate goal such as paying off a mortgage or other debt that can make you thousands of dollars richer than borrow-to-invest schemes when alternative investments are in--or are about to enter--the doldrums.

Always do the math for your specific circumstance and do not rely on optimistic promises.

Wednesday, August 1, 2007

Lazy Man recently posted about taking the personal out of personal finance. He and the commenters made good points about how, if people need psychological or morale boosts, they should get boosts by seeing the benefits of the rational choice, rather than wallowing in the bliss of ignorance. I agree so far but there are important distinctions about which "personal" intrusions are bad.

Different valuations are inevitable.

First, people put personal values on items but I do not think that is what we mean by "psychological" irrationality. We cannot say, "You should have bought the whiskey that is on sale because it is clearly a better dollar-value than the milk." Basic economics says that the only reason people trade is because 2 people value the same item differently. You sell a book because you value the $10 cash more than the book--but you have to find a buyer with the opposite preference of valuing the book more than their $10 cash. If everyone shared your preference, you never would be able to sell. Without differential values/preferences/goals, there is no market.

The key is that everyone is rationally pursuing their different values and goals.

The Illusion of Progress:

Psychological irrationality is working against your goals, when you do not pursue/achieve your goals efficiently.

The problem is when someone wants to eliminate debt but pursues the goal irrationally. I do mean people who give lip service to fiscal health but clearly value other things more such as keeping up with the Joneses or refusing to admit a bad investment decision (although there are clearly psychological issues there). I mean people who fool themselves into bad decisions and think that they are gaining wealth efficiently when they are not.

Do not confuse difficult pricing with emotional irrationality.

Two people can look at "X risk level" and rationally decide differently based on their different personal risk averseness--but do not confuse that with 2 people with identical risk averseness who rationally decide differently because they disagree on what the risk level is. When 2 people disagree that the stock market will return 10%, that is not a difference of risk averseness, that is a mathematical dispute. Quantifying risk and estimating future prices is difficult but it is a mathematical job.